The Power of Perspective: My Post-Mortem on this Move

Perspective is a powerful thing. If there’s one lesson I would bring home from the 2016 Money, Metals, and Mining Cruise to share with you, it’s that.

Standing at the edge of a ship’s railing … and witnessing the awesome beauty and massive size of the Hubbard Glacier … you really do realize how small and insignificant we are – and how powerful Mother Nature can be. The vast, rugged and serene wilderness of Alaska even farther up and down the coast imparts the same sense of awe.

But of course, my primary focus in Money and Markets is helping you build and protect your wealth. And even on our voyage, my mind never strayed far from the markets, thanks to satellite Internet access and time logged on in port.

There’s no sugarcoating the fact the broad markets had a powerful move out of their prior, multi-month trading range. That raises a couple of obvious questions: Is this the start of a fresh, major rally in stocks … and do we as investors need to dramatically alter our strategies and positions in response?

The vast, rugged and serene wilderness of Alaska.

Let’s start with some perspective on the rally’s driver: Talk of even more policy action in Japan. Former Federal Reserve Chairman Ben Bernanke traveled to that country last week to meet with central bank and government officials. The Bank of Japan’s next policy meeting is scheduled for July 28-29.

Investors put two and two together, and put on a bunch of trades that suggest they’re expecting a new, massive form of stimulus called “helicopter money.” Specifically, they sold Treasury bonds, sold the Japanese yen, and sold gold, while simultaneously shifting from safer, lower-growth, lower-volatility stocks into stocks with greater leverage to economic growth.

So what is helicopter money? The idea is that the government would issue an unspecified amount of bonds that never mature (called perpetual debt) and that don’t pay a coupon. The BOJ would then buy those bonds and sit on them. The government would use the funds raised to pay for infrastructure, tax cuts, social spending or anything else it wanted to goose economic growth.

Bernanke famously compared the approach to throwing money from helicopters in a speech several years ago, and the name stuck. But in reality, the BOJ is basically doing something very similar to that with QE anyway.

It has been vacuuming up massive amounts of government bonds for years, not to mention everything from real estate shares to ETFs. Yes, it’s technically purchasing debt from intermediaries like banks rather than directly from the government. But it’s a distinction without a difference. After all, the result is that the Japanese government can already borrow at 0% interest rates and has already launched multiple rounds of fiscal stimulus over the past two decades.

But none of those actions has kept the Japanese economy from falling in and out of recession since the 1990s. Nor have they helped push Japan’s market anywhere near its all-time, pre-bust highs.

As an interesting historical footnote, Japan tried helicopter money before – before the helicopter was even invented, in fact. Korekiyo Takahashi launched a massive borrow-and-spend program when he was the architect of Japanese financial policy in the early 1930s.

But things didn’t work out so well. After attempting to get government spending back under control, Takahashi was assassinated in 1936. World War II broke out shortly thereafter.

What about the technical underpinnings of the rally? Here’s my perspective on that one: If you look purely at price action, the Dow Jones Industrial Average and Standard & Poor’s 500 Index have clearly taken out their old highs. Market breadth has also been fairly healthy.

But volume in some of the ETFs and futures that track the major averages is somewhat lacking. The Dow Transports and Russell 2000 remain far below their past highs. The rally is taking place without the benefit of a fresh move up in oil, whereas oil and stocks were previously confirming each other’s moves. And at the start of the 2007-09 meltdown, the Dow and S&P 500 also managed to notch marginal new highs in October – before plunging thousands of points.

Then there’s the perspective you get from looking at other markets outside of stocks, like interest rates. The yield on the 30-year Treasury is definitely off its lows, rising from 2.1% to 2.32% last week. Yields on 10s and 5s have also risen. But they’re only back to where we were less than a month ago.

In fact, in my All Weather Trader service, I took multiple rounds of profits on a large position in a leveraged bond ETF in recent weeks. Before the cruise, I raised the recommended stop on the remaining shares to what I considered to be an elevated level as a protective move. But the Treasury market correction last week wasn’t even enough to trigger that stop.

Lastly, let me provide some perspective on stock market positioning. The “Safe Yielders” I’ve been recommending for a long, long time have been dominating in terms of performance. Investors did begin to rotate out of those safety-oriented names, and shift money into more economically sensitive sectors.

But take a look at this chart of just one safe sector ETF, the Utilities Select Sector SPDR Fund (XLU). You can see it also suffered sharp, short-term pullbacks in late February, April and May, as well as a brief pause in its advance in June. But not one of those corrections proved to change the broader trend.

Bottom line? Many others have already weighed in on the recent attempted breakout and offered their takes. But my post-mortem analysis doesn’t suggest we’ve seen any major trend shifts.

If anything, it’s just a good time to do exactly what I’ve been doing in my services throughout this long move – taking some profits along the way, closing out a loser or two, and repositioning into investments with even bigger profit potential down the road. And if incoming information suggests something else is afoot here, we’ll adapt as necessary.

So what do you think? Is perspective as important as I suggest it is here? Or does this nominal breakout in the major averages tell you it’s time to get on board before stocks soar higher?

What about the shift in winning sectors versus losing sectors? Is that a big deal, or just another correction along the way to outperformance for “Safe Yielders?” What, if anything, are you doing in your portfolio right now? Let me know in the comment section.

Until next time,

Mike

Our Readers Speak

Of course, several of you weighed in on columns my colleagues wrote in my absence. Let’s get right to those remarks now.

Reader Howard said he isn’t quite ready to jump on board the market rally in the financial sector, saying: “At some point in time, those with capital will decide that regardless of the meager returns, their principal is worth protecting. What the Fed is managing at the moment is the recapitalization of their member banks at the expense of consumers.”

Reader Stephen also expressed skepticism, saying: “An algo-driven rally is hardly a ‘buying stampede.’ Everyone knows it’s the central banks splattering liquidity into the system driving this robo-run. At some point, fundies are going to matter again and that won’t be a pretty sight!”

Reader Charles K. said he was confused more than anything else about what’s going on. His take: “It is hard to make decisions when one group says the next recession is looming and another says the market will continue to boom. It would be very helpful to give suggestions on how to come up with a short-, medium- and long-term strategy (age dependent) so we do not have to react to every little bump that occurs.”

As for Reader F151, the following comments came in response to a recent column on Merrill Lynch’s outlook: “The Merrill prediction is very bullish, and the rise from late June has been quite extraordinary. My prediction of that time on this board was: ‘The Dow is looking very bullish right now with a pattern that could carry another 100 points up, one more step back of a few hundred points, and then it should be off to the races for a while. The final blow-off races before the big, big fall. If it can break through resistance, I think Dow hitting 18,600+ would not be unreasonable.’

“We are almost there but I will have to revise upward to allow for completion of the pattern. We should soon have some limited retracement soon but I am going to estimate somewhere around 19,500+ Dow based on the now developing chart. This market is ready to rock. But once these patterns are completed, then comes the big collapse. And it will be VERY big. This IS a blow-off rally, in my opinion.”

Regardless of the broader market’s direction, Reader Brownstone said investing in the food sector could pay off: “The best stocks to buy are in the health and food industry. People need to stay healthy and eat good food. Water is my third choice.”

Finally, Reader James suggested infrastructure might be worth looking at – as long as politicians are willing to invest in the space. His take: “I agree with Stu about the problems with the grid. If we are plagued with black outs in our major cities, there will be big problems. No one is prepared for these situations. Most people do not have generators to keep their refrigerators running or to power some lamps to provide light at night.

“Our old bridges are also very dangerous. And our old sewer systems have been collapsing left and right and cannot handle heavy rains. I hope whoever is in the Oval Office will start working on these problems.”

Thanks for sharing those observations. You know where I stand now, and I really enjoyed going into much more detail on the cruise. If you weren’t able to join me in person, don’t worry. I have other appearances scheduled elsewhere later this year.

Your next chance will be at The MoneyShow Toronto, scheduled for September 16-17, 2016. You can register for free by clicking here or by calling 800-970-4355 and mentioning priority code “041484.”

Other Developments of the Day

The lead Federal Reserve watcher at the Wall Street Journal reported today that the Fed is more confident about plans to raise interest rates later this year. That’s essentially a 180-degree swing from just a couple weeks ago, when Fed stories and speeches suggested there would be no hike any time soon. In other words, flip-flopping and uncertainty about the longer term continues.

Authorities are now convinced that the three police officers killed in Baton Rouge, Louisiana, over the weekend were deliberately assassinated. A former Marine, Gavin Eugene Long, allegedly shot them out of anger over recent police killings of black civilians. Long left a trail of anti-government, radical postings online.

The powerful Fox News Chairman Roger Ailes could be on his way out, according to media reports. Ailes is the subject of a sexual harassment lawsuit from former anchor Gretchen Carlson, and the sons of longtime News Corp. (NWS) Chairman Rupert Murdoch may have had enough. The company itself said an internal review is still ongoing.

Sorting through the mess left behind by credit busts is always a Herculean task. But nowhere is that more true than in Italy, a country whose banks have been reeling under the weight of an estimated 360 billion euros worth of delinquent and defaulted loans.

This fascinating Bloomberg story zeroes in on the difficult task of resolving just a couple of securities packed with bundled, delinquent mortgages. It notes that it takes an average of 7.8 years for bankruptcy cases to wind their way through Italian courts, compared with around two years for other euro-area nations.

What do you think about the Fed’s on-again, off-again “plan” to raise interest rates? How about the latest tragic police shooting in Louisiana? And will the mess in the European banking system ever be resolved to the satisfaction of bank shareholders and investors overall? Let me hear about it in the comment section.

Until next time,

Mike Larson

A note from Jeff Cantor: Unfortunately, in our world, mass shootings and terrorism seem to be accelerating… and in our own backyard. That’s why I created the Active Shooter course. Learn techniques that can save your life and the lives of your loved ones. Click here now.

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{19 comments }

JustinTuesday, July 19, 2016 at 5:05 pm

This move actually started last February, which was similar to October 2014, and current action is looking more and more like February 2015. Think of an arrow shot into the sky that eventually reaches apogee. Current price action is looking like it is reaching apogee. The outlook is months of useless trading range action.

Chuck BurtonTuesday, July 19, 2016 at 5:14 pm

Why would any government expect people to buy it’s bonds, if they don’t pay interest that is at least higher than the inflation rate? Doing so would be the same, in the long run, as throwing away money. If the Fed is really serious about raising rates, they are at least moving in the proper direction – but they also need to hold down inflation while they are at it.

Todd SelleTuesday, July 19, 2016 at 5:17 pm

I am doubtful that the Fed will raise interest rates anytime in the foreseeable future. We’ve heard its plans to do so for quite some time, but when the Fed meetings happen the decision to follow through has only been made once – and that in a minor way. The result was a rapid drop in equities, and it’s unlikely the Fed wants to risk this again. Both the Fed and most large investors are probably aware of how dependent equity prices are on low interest rates, especially given the degree to which margin debt and corporate buybacks now drive share prices.

Outside of equity markets, the Fed is also probably influenced by the recognition of what increased interest rates would do to the U.S. Federal budget over the long term. At 2% interest, the American government needs to pay $380 billion per year in interest – about 10% of the federal budget. Each basis point increase in interest rates automatically adds $19 billion to federal spending as bonds roll over – about one year’s earnings from Apple, recently the most profitable company on Earth. That’s a lot!

BroomyTuesday, July 19, 2016 at 5:22 pm

Quoting the article: “The lead Federal Reserve watcher at the Wall Street Journal reported today that the Fed is more confident about plans to raise interest rates later this year. That’s essentially a 180-degree swing from just a couple weeks ago, when Fed stories and speeches suggested there would be no hike any time soon. In other words, flip-flopping and uncertainty about the longer term continues.”

You can call it flip-flopping. I prefer to call it data-based decision making. The economy is improving, and because of that the economy can stand a rate increase.

Willard BennettTuesday, July 19, 2016 at 5:22 pm

Do I need to draw out my savings from the bank ? If I do , what do I do with it ? When will our currency be worthless ? When do you think the SHTF ?

If you do take some money out make sure you did what that old lady said she did during the depression . She always had lots of smaller bills on her . So it means do not take everything in larger bills as no one may be able to break them and give you change . Just a thought .

WasteLand WarriorTuesday, July 19, 2016 at 10:05 pm

They must have a “boat”load of derivatives based on Paschi loans and debt..other wise why would they come in to save them (temporarily)..time to short JP morgan…

FredTuesday, July 19, 2016 at 6:24 pm

With a major regional bank I manage a $2.3 million personal trust dating to 1956 with the longest held stock bought in 1968. For the past decade changes have been slow moving and infrequent. I’m 84 years of age. There are huge capital gains awaiting hopefully reevaluatiion to market on my death.Lately a stock investment in Lowe’s got so large that we sold 1/3 and reinvested in Corning and Keybank. The same parties manage my much smaller IRA in individual stocks. I’ve been saving since 2010 plus giving to my daughter as I have since 1992. I pay half of the tuitions of my grandson and granddaughter at a leading private school. The Lowe’s sale produced a $60,000 long term capital gain. In my brokerage account I did buy the I-shares major cap China fund. In my brokerage account. I’m holding losing stocks unbtil year end top see how many recover.

WasteLand WarriorTuesday, July 19, 2016 at 10:44 pm

84 with 2.3 million and you only pay half of your grandchildrens education?? can I ask what you are saving your money for? I am always amazed at how people think they will live forever…My mother paid off my mortgage when I was 40 and said that I would get less form the inheritance when she died. but she said she wanted to see me enjoy my life early rather than die with lots of cash in the bank and not see me enjoy it and know that I struggled more than I had to and only profited once she was gone and by then I would be too old to really take advantage of it, paying all sorts of interest…Instead her gift to me accelerated my savings and alowwed me to enjoy so many things I normally wouldn’t have, and I thank her everyday for it!…If you loved your grandchildren you would take some of that 2.3 million and buy them houses that they could live in and not have to pay hundreds of thousands of dollars in interest to the scumbag banks throughout their lives… Instead you are sitting there accumulating a number on a bank account balance sheet that does nobody good…I hope you re-evaluate your strategy. Your grandchildren will love you for it..

PhilTuesday, July 19, 2016 at 11:15 pm

Fred: And your point is what? Are you trying to brag about how much money you have?

VinmanTuesday, July 19, 2016 at 6:33 pm

I think government buying in the equities forced the shorts to cover and that gave the energy the markets needed to make new highs . I also think the Dow transports have not yet confirmed this move higher so we shall see if they do or not ????
Still some troubled spots in the Baltic Dry indexes and the rail indexes along with 5 straight quarters of lower S& P earnings , makes me wonder if we are headed for a stock market correction????

tasmicaTuesday, July 19, 2016 at 7:28 pm

What I’m doing: given the state of the “bond world” with negative or absurdly low rates and/or increasing junk bond defaults along with the recent gains in the US equity markets, I am long equities with very tight stops and going with the market as it expands to new highs. I “guessed” correctly on Brexit, so I did OK on the volatility that vote triggered and plowed the profits back into equities. Finally, I am long a silver/gold streaming stock with the technicals looking pretty positive. In sum, I’ll take it a day at a time….since the markets could continue to increase for one day, one week, one month, or even a year or more….so I’ll cautiously go with the momentum.

HowardWednesday, July 20, 2016 at 7:07 am

Hi Mike

Hubbard is impressive, particularly when you consider its weight, bulk, motion and 400 year plus age at the front. As to the markets, I still believe at these levels it’s a crap shoot. I’ve pulled out and am patiently waiting for another day. Besides cash gives me immediate choice for all asset classes when the occasion comes.

HowardWednesday, July 20, 2016 at 4:27 pm

The public will be completely caught of guard when the next black swan hits. While one party is focused on Hillary, the media sympathisers for the other side are focused on speech writers. Our election cycles are full of negatives and go on for far too long.

DaveWednesday, July 20, 2016 at 7:26 am

I am extremely disappointed in how Wall Street handles (misleads) on earnings. This mornings CNBC headline is “Morgan Stanley solidly beats earnings expectations” yet from same period last year, earnings and rev are down 5% and 9%, respectively…….and this is not the first of the misleading bank earnings reports this week. The “smoke and mirrors” of trying to pull in all the sideline cash. From a historical perspective, 1929 all over again…..without the heavy margin buys. Am I missing something folks?

CUZIN ERNWednesday, July 20, 2016 at 5:30 pm

Who or what country will buy our hole in the ground at about twice the amount shown?

VinmanWednesday, July 20, 2016 at 6:33 pm

Dave
True it just means they expected it to be worse than it was and yes investors have trust but verify . Only they may be disappointed when they verify !

Betty OlsonFriday, July 22, 2016 at 10:57 pm

I just to thank you for your knowledge and your help to navigate the markets.